Academic journal article Federal Reserve Bank of St. Louis Review

An International Perspective on the Recent Behavior of Inflation

Academic journal article Federal Reserve Bank of St. Louis Review

An International Perspective on the Recent Behavior of Inflation

Article excerpt

The 2007-09 financial crisis was accompanied by the first global recession in decades (Imbs, 2010). During that global recession and subsequent recovery, the behavior of inflation has attracted the interest of policymakers and researchers. In particular, several commentators have voiced concerns about low inflation in the euro area--or "low-flation," as the International Monetary Fund (IMF) recently described this environment (see Moghadam, Teja, and Berkmen, 2014). Several other advanced economies have experienced either below-target inflation or outright, if mild, deflation.

In this article, we collect inflation data for nine advanced economies: three large advanced economies (the euro area, Japan, and the United States) and three small open economies (Sweden, Switzerland, and the United Kingdom)--all of which have implemented or are still implementing some form of program designed to increase the size of the central bank's balance sheet (such as large-scale asset purchases [LSAPs])--plus three small open economies without LSAP programs (Canada, Denmark, and Norway). We then document several facts about the behavior of inflation during the 2002:01-2014:04 period. (1) First, we show informally that the relationship between inflation rates and short-term interest rates displays similar changes across advanced economies with and without large LSAP programs. Second, we document that headline and core inflation have recently been below inflation targets in all nine countries. However, observing inflation and price levels from a medium-term perspective reveals some important heterogeneity; very few countries are far from their medium-run objective. We discuss various explanations for this phenomenon: global shocks, economic slack, and changing inflation expectations. Among the large economies, the recent behavior of inflation suggests different trends and explanations. Finally, we show that the cross-country correlation of inflation is no longer higher than the cross-country correlation of output.


A large body of research has examined recent changes in monetary policy in advanced economies (see, for example, Bullard, 2010; Fawley and Neely, 2014; and Thornton, 2014). Here we provide a synthetic description of the monetary policy framework and stance in the nine economies studied. In most figures, the top panel represents the three large economies (the euro area, Japan, and the United States), all of which have implemented (or are still implementing) some form of LSAP program, as measured by a large expansion of the central bank's balance sheet. The middle panel represents the three small open economies (Sweden, Switzerland, and the United Kingdom) that have implemented or had implemented some form of LSAP program. The bottom panel represents the three small open economies (Canada, Denmark, and Norway) without LSAP programs.

Table 1 summarizes the historical and current inflation targets and the monetary policy instrument. Figure 1 plots the monetary policy rates of the nine economies and the asset sizes of their respective central bank balance sheets divided by nominal gross domestic product (GDP); this provides a sense of the magnitude of the unconventional monetary policy. Generally speaking, at the time this article was written, policy rates for most countries were at or close to the zero lower bound and had been there for a few years. In six of the economies, different LSAPs have been used in combination with extremely accommodative policy rates. Seven of these countries use forward guidance, as discussed below.

Inflation Targeting

Inflation targets are implemented in about 30 countries in various formats. Hammond (2012) provides an excellent review of the main modalities and country experiences. Hatcher and Minford (2013) survey recent strands of the literature to compare inflation targeting and price-level targeting as macroeconomic stabilization policies. …

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